A single, low-entry mortgage can be a balm for Southern California’s high home prices, providing an option that most affordable home loan programs don’t address.
The loan, a first I have ever seen, is offered through community development financial institutions and does not care about how applicants look or where they want to live. Minimum combined loan amounts range from $150,000 to a maximum of $3.5 million. (The first loan limit is $3 million and the second is $500,000).
As long as the borrower has at least a 15% down payment for an owner-occupied home or condo, an average FICO score of at least 680, and some home payment reserves, they just might be able to. to buy housing.
Buyer beware: mortgage rates are high, however, in the range of 7% to 8%.
The income portion of this particular mortgage application is a blank slate. Volatile, irregular or transient jobs (due to COVID, for example), cash businesses, retirees, seasonal or on-demand workers and even recent immigrants may qualify. Proving the ability to repay is a non-starter. It’s NINJ (no income, no job) with a small down payment.
Today’s mortgage standards are not designed for borrowers with unusual or atypical means of income to make monthly payments. The conventional real estate financing structure is a tight and complicated institutional underwriting box. If you don’t fit in the box, too bad. Every day across America, potential buyers are denied access to mortgages because they cannot prove the government’s litmus test standard for repayment ability.
These systematically unqualified buyers are forced to rent, often paying top dollar. Regardless of their income. There are no formal regulations for landlords to qualify based on income or demonstrate the ability of prospective tenants to pay monthly rent. Unqualified candidates sign leases every day as long as they have the initial funds to satisfy the landlord.
Those who cannot pay often look the eviction straight in the eye. So what’s the difference between this and an unconditional home loan?
Most family wealth comes from or begins with homeownership equity, mortgage debt repayments, and repayments. Without cash on hand, it’s hard to create new family wealth in America, especially when traditional loan approvals are out of reach.
Authorized by the US Department of Treasury, community development financial institutions, two of which offer this loan, are exempt from certain consumer finance rules and regulations (such as proving repayment capacity). The big idea is to find various ways to expand economic opportunities like home ownership for the unserved and underserved.
Here is an example of how the Community Development Loan works:
A buyer lands a home at the median price of $797,000, or 15% down payment or $119,550. To avoid mortgage insurance, the first mortgage is $597,750 and the piggyback loan is $79,700 for a total of $677,450. In this example, both loans are fixed rate for 30 years and both can be interest only for the first 10 years. After 10 years, borrowers have 20 years left to amortize and repay the loans.
Assuming a FICO score of 740, the first interest-only payment at a 7.25% interest rate is $3,611. The second interest-only loan payment at 8.5% is $565. Monthly property taxes are $830 (assuming a 1.25% tax rate) and estimate home insurance is $175 per month. The total monthly payment is $5,181.
In addition to the payment, this first loan would cost approximately 1,625 points or $9,713, while the second would cost 1 point or $797. In addition, there are settlement fees such as escrow, title, valuation, and underwriting. The buyer is looking at around $17,000 in total points, fixed costs and escrow. In this example, they will also need three months of house payments in reserve or $15,543. The down payment, closing costs and payment reserves total $152,093.
Note that the down payment and closing costs may be a donation. The home’s payment reserves must come from the borrowers’ own funds. Reserves must have been seasoned in the borrower’s account for at least one month.
Black or Hispanic applicants will get a quarter percent off the first loan rate, but not the second. In total, the house payment would be $156 lower in the example above at a 7% interest rate.
This loan option, with slightly different terms, also includes cash refinances and refinances as well as second homes and investment properties.
With as little as 15% down payment and the ability to do little more than fog up a mirror to get in, could some people naively buy and not be able to keep up with the payments, ultimately losing the house and down payment at foreclosure? Sure.
So, no, it’s not a perfect system. But it gives the benefit of the doubt in this world of flawed mortgage financing to a borrower who has a few shekels and decent credit. Better to exclude people than to exclude them.
Freddie Mac Rate News
The 30-year fixed rate averaged 5.1%, fifteen basis points lower than last week. The 15-year fixed rate averaged 4.31%, twelve basis points lower than last week. The 5-year ARM averaged 4.2%, twelve basis points higher than last week.
The Mortgage Bankers Association reported a 1.2% drop in mortgage application volume from the previous week.
At the end of the line : Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $803 less than this week’s payment of $3,514.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages without points: A 30-year FHA at 4.375%, a 15-year conventional at 4.125%, a 30-year conventional at 4.875%, a balance (647,201 $ to $970,800) at 4.875%, a conventional 30-year high balance at 5.25%, and a 30-year jumbo buy, pegged at 4.75%.
To note: The 30-year FHA-compliant loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye-Catching Loan of the Week: A giant 30-year adjustable mortgage, locked in for the first five years at 3.75% with 1 point.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected]